Does Corruption Limit China’s Growth, or Pose a Threat to its Existence?

Summary: Critics of China often cite its high level of corruption as a limiting factor to its growth, or a possible cause of its fall — or even disintegration. Like so many of American’s views about China, it’s false. Probably a way to diffuse awareness that a powerful rival has emerged on the world stage. Here we compare China’s corruption to that of America’s past — and present.

This paper compares corruption in China over the past 15 years with corruption in the U.S. between 1870 and 1930, periods that are roughly comparable in terms of real income per capita. Corruption indicators for both countries and both periods are constructed by tracking corruption news in prominent U.S. newspapers. Several robustness checks confirm the reliability of the constructed corruption indices for both countries.

The comparison indicates that corruption in the U.S. in the early 1870s — when it’s real income per capita was about $2,800 (in 2005 dollars) — was 7 to 9 times higher than China’s corruption level in 1996, the corresponding year in terms of income per capita. By the time the U.S. reached $7,500 in 1928 — approximately equivalent to China’s real income per capita in 2009 — corruption was similar in both countries.

The findings imply that, while corruption in China is an issue that merits attention, it is not at alarmingly high levels, compared to the U.S. historical experience. The paper further argues that the corruption and development experiences of both the U.S. and China appear to be consistent with the “life-cycle” theory of corruption — rising at the early stages of development, and declining after modernization has taken place. Hence, as China continues its development process, corruption will likely decline.

(2) Late 19th century America

This unflattering comparison of modern China with late 19th century America should not surprise us. Post-civil war America (especially the Gilded Age) America was a horror show. Public and private force was used to suppress Blacks, American Indians, Asians, and workers (see the Wikipedia entry, also for the1892 Homestead Strike and the 1894 Pullman Strike). When the cavalry arrived, it was often to help the bad guys (or one of the groups of dueling bad guys, as in the Lincoln County War).

Justice was for sale. Public resources were for sale through bribery. The government itself was for sale (or lease). Only national amnesia makes this era a subject of pride instead of shame.

This makes our recovery during the next century even more impressive (1900 – 1970; the Progressive Era, the New Deal, and the post-WWII renaissance) . We can learn must from our history; our amnesia is among our greatest weaknesses.

(3) America today

We have come far from the Gilded Age. But not as far as we think.

We boast about our fine accounting standards. But the bursting of the tech and real estate bubbles resulting in massive restatements of corporate books — revealing massive fakery of the books of our leading corporations.

The defense industry is little but a on-going process of systematic corruption.

The FBI’s Abscam sting (1978-1980) proved how easily — and cheaply — Federal officials could be bribed. We can only imagine how many could be caught from a large-scale and sustained anti-corruption program.

Perhaps the key difference between China and the US is that we’ve normalized corruption. Our representatives in Washington take money through their campaigns (easily converted to personal use) and spouses (rumors abound of the lavish incomes of Washington spouses from what are in effect bribes). Mid-level and senior officials ride the revolving door from public service to personal profit.